Gross Domestic Product: How it is Measured

There are three ways of measuring GDP, each of which should give the same answer. These methods are:

1. The Output Method (all value added by each producer),
2. The Income Method (all income generated) and
3. The Expenditure Method (all spending).

Output Method

The Output Method measures GDP as the value of

• Output (what is produced)
• minus the value of goods and services used up in producing these outputs (the inputs or Intermediate Consumption)
• plus all Taxes on Products like VAT
• minus all Subsidies on Products like renewable energy subsidies

Income Method

The income method measures GDP by adding together:

• The Gross Profit of companies and the Self-Employed,
• plus the wages of employees (Compensation of Employees).
• plus all Taxes on Products like VAT
• minus all Subsidies on Products like renewable energy subsidies.

Expenditure Method

In the expenditure approach, as the name implies, we measure how much is spent on goods and services. It is important that spending is only counted once. We estimate:

• Consumer spending by individuals Personal Consumption Expenditure)
• plus Net Expenditure by Central and Local Government
• plus all Capital Spending (such as buildings and machines)
• plus Exports, since exports contribute to Ireland's GDP because it is spending by other countries on Irish produced goods and services
• minus Imports because this total is spending on the outputs of other countries.

Different countries use different combinations of methods. In Ireland we use all three methods to calculate annual GDP estimates, and we use the output and expenditure methods for quarterly GDP. Like all other countries, the quarterly and annual estimates are always made to align so that the annual GDP equals the sum of the GDP in the four quarters of that year.  

The three approaches to GDP should theoretically give the same answer. However, in practice they will always diverge to some extent because they are derived from different data sources. In Ireland, the official level of GDP is taken to be the average of the estimates. A balancing item (statistical discrepancy) is displayed in the GDP accounts which is the difference between the estimate by each method and the official GDP. For example, if one method gives an estimate of €499bn and the other method gives an estimate of €501bn then the official GDP will be €500bn, and the first method will include a statistical discrepancy of +€1bn, and the other method will include a statistical discrepancy of -€1bn. 

In making these estimates, CSO uses a wide variety of sources. Almost all of the different inquiries conducted by CSO are used in one way or another. For example, data on employment from the Labour Force Survey (LFS) helps in calculating total wages and salaries, the Household Budget Survey is used in estimating personal spending and so on. We also make a lot of use of data collected by the Revenue Commissioners and any other government bodies that can help improve the quality of the estimates.

Read next: Growth Rate

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